The Future Fund – Lifeline for UK Start-Ups

What is the scheme?

The UK Government has unveiled plans for a new co-investment fund titled the ‘Future Fund’ designed to ensure venture capital backed companies across the UK receive enough investment to remain viable during the coronavirus crisis. The Future Fund will launch in May 2020 and will remain open until the end of September 2020 – with the aim of providing government backed convertible loans to UK based companies ranging from £125,000 to £5 million.

These convertible loans may be a suitable option for companies that rely on equity investment and are unable to access the Coronavirus Business Interruption Loan Scheme. These loans will need to be repaid by the company after 3 years or converted into equity stakes in the company – these are commonly referred to as ‘convertible loan notes’.

A convertible loan note is a debt, with a mechanism to allow for the principal amount of the loan (plus any interest) to convert into equity on certain triggering events (for example – (i) a future funding round, (ii) the sale of the company or (iii) the maturity of the loan notes). Convertible loan notes are frequently used for raising modest amounts of capital at a start-up’s seed round of financing.

Who is eligible for the scheme?

The Future Fund will be open to companies based in the UK, provided the company:

can attract the equivalent match funding from third party investors and/or institutions; and

has previously raised at least £250,000 in equity investment from third party investors within the last 5 years.

These eligibility criteria will have been added to reduce and filter the number of companies who can apply for the scheme. There may be some concern that the requirement to source equivalent match funding may prove difficult, particularly given the current investment landscape. However, we can only speculate that this criterion has been added to ensure that the private sector has ‘skin in the game’ and to limit the risk of the scheme being exploited and used as a prop to support less successful companies.

What are the terms of the investment?

As with any investment it is important to consider the proposed terms. A comprehensive breakdown of the key terms has been provided here and we have summarised below:

Use of funding – the funding must be used solely to meet the working capital requirements of the company and cannot be used to repay borrowings and/or to pay dividends or bonuses to staff, management or shareholders.

Interest rate – a minimum of 8% interest per annum shall be payable on maturation of the loan.

Term – the loan shall mature after a maximum of 36 months (3 years).

Conversiontrigger events – the loan shall convert to equity in each of the following scenarios:

Qualifying Funding Round – the loan shall automatically convert to equity on the next qualifying funding round (where the company raises an amount equal to at least the aggregate amount of the bridge funding round) at a 20% discount to the valuation set at that funding round.

Non-Qualifying Funding Round – the loan shall, at the election of the holders of a majority of the loan notes, convert to equity at a 20% discount to the valuation set at that funding round.

Sale/IPO – the loan shall either (i) convert into equity, at the 20% discount rate, immediately prior to the sale/IPO or (ii) be repaid in full with a redemption premium (equivalent to 100% of the principal of the bridge funding), whichever will provide the higher amount.

Maturity of the loan – at the end of the 36 month term the loan shall, at the election of the holders of a majority of the loan notes, (i) be repaid by the company with a redemption premium (see above) or (ii) convert into equity, at the 20% discount rate to the valuation set at the most recent funding round.

If you would like to discuss the scheme, please do not hesitate to contact Brendan Donnelly Brendan.Donnelly@tughans.com or your usual Tughans contact for further advice and guidance.

While great care has been taken in the preparation of the content of this article, it does not purport to be a comprehensive statement of the relevant law and full professional advice should be taken before any action is taken in reliance on any item covered.